What’s not to like about 401(k) accounts? Most companies offering these retirement savings plans match a portion of the employee’s paycheck deductions. Contributions are exempt from income tax. Investment earnings grow tax-free until withdrawal.
The problem is that many of the 60 million workers with these job perks are in the dark about what they pay for the privilege of investing in them. It’s no easy task getting clear information about the half-dozen or more fees that may be charged for investment management, record keeping, administration and other services.
Federal disclosure requirements taking effect this summer should make it easier to see how much is being shaved off the top of investment returns.
Yet workers will continue to be at the mercy of others. That’s because it’s employers who hire mutual fund companies and other plan providers. They’re also the ones selecting the funds and other investment options that workers choose from. So it hardly inspires confidence that many of those employers are ill-informed about basic information on the fees paid to providers — costs which are primarily borne by workers, not employers.
The extent of the problem is documented in a report released last week by Congress’ nonpartisan Government Accountability Office. The GAO surveyed a representative sample of 1,000 plan-sponsoring companies, yielding 365 responses. Among the findings:
• Half of the plan sponsors did not know if they or their plan participants paid investment management fees, or they mistakenly believed those fees were waived. That was the case for 57 percent of small plan sponsors, defined as those with fewer than 50 participants. Even among large sponsors with at least 500 participants, 31 percent didn’t know. It’s disturbing because investment management fees account for the majority of overall 401(k) fees. They’re paid to managers who select stocks, bonds or other investments in funds that 401(k) assets are invested in. Plan sponsors may be unaware because management fees are typically deducted from a participant’s account, rather than being invoiced to the plan sponsor, the GAO said.
• Many sponsors reported they asked providers little about which fees were charged.
• Few use or are aware of resources the U.S. Department of Labor offers to help companies compare fees charged by providers. Fewer than 6 percent consulted an agency publication on 401(k) fees. The GAO concluded sponsors typically rely on providers for fee information and advice.
The findings don’t surprise Mike Alfred, CEO of BrightScope Inc., which estimates fee amounts of 401(k) plan fees using publicly available data. The company works with plan sponsors and their advisers, as well as providers.
Alfred frequently sees a lack of strong oversight by sponsors who should be ensuring their employees can invest in high-quality, low-cost plans. Oversight of a company’s 401(k) is typically a low priority for human resources managers, chief financial officers or others who juggle many responsibilities.
“The one thing they pay attention to is how much the company pays to offer the plan,” Alfred said. “But they generally don’t know what the participants are paying within the plan.”
The Plan Sponsor Council of America, representing companies offering 401(k) plans, says the GAO findings don’t fully reflect the frequently strong oversight at many large employers. The group’s president, David Wray, said about two-thirds of 401(k) participants work at companies with more than 1,000 employees. “Those companies are pretty much on top of their fees,” Wray said.
As for smaller companies, “they do not often have the same kind of expertise, and certainly they don’t have the staff time” to devote to scrutinizing fees, he says.Mark Jewell is a personal finance reporter for The Associated Press.